The extraordinary run-up in real estate prices like the one experienced in the Lower Mainland raises the odds of a painful market correction
How can people afford to live in Vancouver? That question came to mind as I struggled to catch up with the latest torrent of media stories on the Lower Mainland’s seemingly inexhaustible housing boom.
Metro Vancouver has long been the most expensive place in the country to purchase (or rent) a home. Indeed, relative to the incomes of area residents, it ranks among the priciest markets in the world.
Twice a year, the Royal Bank of Canada (RBC) estimates the proportion of median pre-tax household income needed to service a mortgage and cover property tax and utility charges on a standard detached home and a standard condominium. The term ‘standard’ implies a residence of modest space and quality.
The RBC analysts assume that homeowners contribute a 25 per cent down payment and take out a 25-year mortgage at a fixed five-year rate.
Using this methodology, the cost of purchasing and operating a single-family home now amounts to 112 per cent of median pre-tax income for the typical Metro Vancouver household. For a standard condominium, the cost is much lower – around 44 per cent of median income (although this excludes maintenance fees).
The Greater Vancouver market is the least affordable in Canada, across all categories of housing. For a standard detached residence, home ownership costs absorb 72 per cent of median household income in Greater Toronto, 43 per cent in Montreal, 40 per cent in Calgary and 38 per cent in Ottawa. For a standard condominium, ownership costs in Metro Vancouver also exceed those in other cities, albeit not by as much.
How do people in the Lower Mainland manage amid sky-high housing prices?
There are several factors to keep in mind.
First, in recent years up to 10 per cent of Metro Vancouver homebuyers have been foreigners who don’t work in Canada or rely on the local economy to generate income. Such foreign purchasers have played a notable role in driving Vancouver-area housing prices higher, although by how much is unclear. The B.C. government’s 15 per cent tax on foreign property purchases in Metro Vancouver appears to have dampened foreign demand but not by enough to trigger a significant market adjustment.
Second, compared to other metro areas in Canada (and the U.S.), Lower Mainland homeowners get less for their money. They accept smaller spaces, fewer amenities and longer commutes. An ever-rising share of area residents occupy condominiums of less than 900 square feet, and they are far more affordable than single family homes. Even couples with two children in Greater Vancouver often end up in smallish condominiums – something that’s less common in most other North American cities.
Third, a large majority of Lower Mainland homeowners acquired their properties 10 or more years ago, when prices were dramatically lower. Today’s eye-watering home prices don’t pose a problem for them – indeed, soaring property values have dramatically increased net worth for many homeowners in the region.
Finally, local governments, the development industry and homeowners have innovated to make ownership feasible. Floor space has shrunk in newer developments and densification is well under way across the region. Many single-family homeowners maintain secondary suites that serve as indispensable mortgage helpers. More parents have been stumping up large dollops of cash to enable their adult children to get into the market. In some cases, unrelated individuals or couples combine resources to purchase a detached home in which both reside.
Nevertheless, the reality is that hundreds of thousands of Lower Mainland families are saddled with record debt burdens owing to the high cost of home ownership. An economic shock – a sudden jump in unemployment or a spike in interest rates – would deliver a blow to many of these heavily-indebted households. A sharp housing market correction would also hurt Metro Vancouver homeowners and could tip the region’s economy into recession. Some economists estimate that a 20 per cent drop in property values would shave at least $100 billion from net worth in Metro Vancouver.
The history of housing booms around the world suggests that an extraordinary, multi-year run-up in real estate prices, like the one experienced in the Lower Mainland, raises the odds of a subsequent painful market correction. Although there is little current evidence pointing this way in Metro Vancouver, the prospect of a significant market downturn can’t be ruled out. And should one occur, many analysts will likely see it as overdue.
By Jock Finlayson
Jock Finlayson is executive vice-president of the Business Council of British Columbia.